Index fund
An index fund is a mutual fund that copies a market index, such as the Nifty 50, instead of trying to beat it. It holds the same companies in the same proportions as the index, so its value follows the market up and down. It promises no return.
How it works
A normal mutual fund has a manager who picks which shares to hold, trying to do better than the market. An index fund has no such guesswork. It simply holds what the index holds, in the same weights, and changes only when the index changes.
What you get and what you give up
Because nobody is choosing shares, these funds are usually cheaper to run than managed funds. You get the market's return, less costs. You also give up any chance of beating the market, and when the market falls, the fund falls with it.
Index fund and ETF
An ETF can also follow an index. The difference is in how you buy it. You buy an index fund from the fund house at its NAV, once a day. You buy an ETF through a broker on the exchange, at the price buyers and sellers agree on right then, the same way you buy a share.
Index fund and SIP
A SIP is a way of putting money in, and an index fund is a kind of fund. They are often used together, but they are different things. You can run a SIP into an index fund, or into any other mutual fund.
How an index fund follows an index (hypothetical numbers)
Suppose an index is made up of 50 companies, and one of them makes up 10 percent of it. An index fund following it would put about 10 percent of its money into that company too. If the index rises 5 percent in a month, the fund would be expected to rise by about the same, less a small difference caused by costs.
Common questions
- What is an index fund in simple words?
- A mutual fund that copies a market index rather than trying to beat it.
- Does an index fund guarantee a return?
- No. It follows the index, so it goes up and down with the market.
- What is the difference between an index fund and an ETF?
- Both can follow an index. You buy an index fund at its daily NAV from the fund house, and you buy an ETF on the exchange through a broker.
- Is an index fund the same as a SIP?
- No. A SIP is a way of investing a fixed amount regularly, and an index fund is a type of mutual fund.